Swedish bank Swedbank said in its latest Asia Analysis that China’s new political leaders should focus on reforms rather than stimulus. Highlights:

“After a massive stimulus through the banks in 2008-2010, China is struggling with overcapacity and bad loans. The situation in the financial sector seems worse than statistics indicate. Many lenders are rolling over loans and hoping that the Chinese central bank again opens the spigot. In recent years China has borrowed from the future, and the question is whether it will choose the easy route with new infrastructure investment or whether it will accept slower growth driven more by household consumption. If the investment fervor continues, there will be a hard landing down the road.

“The economic turnaround now being talked about is based on meager gains and hopes of a new stimulus. A bottom may have been reached, but the recovery will be cautious and vulnerable. We are revising our GDP growth forecast downward from 7.9 percent to 7.7 percent this year and still expect it to stay below 8 percent in 2013 and 2014, in line with China’s goal of 7–7.5 percent in the coming decade.

“The new political leadership is facing major challenges: corruption, a rebalancing of China’s growth model from investments to consumption, a shrinking workforce and concerns about a middle income trap in the absence of innovation. Energy and the environment, urbanization and demographics, and international relations (including maritime conflicts) are also challenging the party and the military.

“China’s leaders should show some backbone and reform rather than resort to more stimulus. The question is whether the new leaders have enough interest in reforming or whether special interests will be allowed to maintain control and protect the status quo. This applies especially to the continued deregulation of the financial sector. This report reviews why it is important and what could prevent further development.

“The global economy would benefit if Chinese growth were lower and more sustainable and if financial deregulation were fully implemented. Countries and companies that are stuck in the old business model will face increasing difficulty, while others could benefit from increased demand from China’s consumers as they place greater value on quality and other long-term considerations.